Summary

We're advising that you hold this business due to its fair fundamentals and fair valuation.

Net income grew 0.6% vs. our 0.89% forecast.

The Wal-Mart (NYSE:WMT) earnings announcement from Aug. 14 was further confirmation of the STRIDE view of this business. While sales were up 2.8%, the company is getting significant pricing pressure in both the U.S. and internationally, with this inflation-tracking sales growth resulting in just 0.6% growth at the bottom line. For a massive, general retail business like Wal-Mart to be keeping up with inflation at the top line, the performance can be described as "adequate" at best.

Our STRIDE ratings show the business is:

strong

currently priced quite fairly (technically)

generating mediocre returns

sitting on a moderate (but shrinking) cash/asset base

managing its dividend policy fairly well

earnings predictability going south rapidly

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How Does Wal-Mart Grow From Here?

It's easy to see why the business is returning $1.85b a year to its shareholders in dividends and share repurchases. They really are running out of ideas rapidly. The one clear area of growth is e-commerce sales, which, at 24% growth, looks promising. But at a run-rate of ~$12b a year, it would need to maintain that level of growth for 10 years just to cover 25% of their current revenue number.

So, it comes down to increasing volumes dramatically. This is where their international segments are going to have to deliver to actually allow this business to grow effectively. While they've achieved reasonable growth (5.8%) so far this year, exchange rates have wiped out roughly half of this growth. Even if this $700m had made it through to the bottom line, it would have resulted in 3% bottom-line growth instead of the 0.6% achieved.

The focus on Africa is an interesting play and may yield results. But, being very familiar with the price pressures in Southern Africa, I wouldn't bet the farm on it. Further acquisitions may work for the company. Again, looking at the time, effort and premium paid for Massmart in South Africa, I'm not sure this actually results in any real bottom-line growth. While they have a great management team who talk a good game, I struggle to see the growth story going forward.

The STRIDE Picture Ahead

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While we are still rating Wal-Mart as a hold currently, it feels as if it's getting closer to a sell with the lack of real growth and the dive in earnings predictability. However, it is still a hold for the following reasons:

1. Fundamentals are getting low, but are still fair.

2. Timing is good, timed closer to entry than exit.

3. Valuation is very slightly above our fair value point.

4. Moat is shallow and increasing in depth and narrow and decreasing in width. This indicates the business is targeting very specific, targeted, repeated measures to work a moat strategy as opposed to broad brush strokes.

5. We're forecasting slight growth and this should be marginally amplified by their value creation program.

In Conclusion

Wal-Mart is massive, cash-rich and targeting growth. The business is a powerhouse and should not be trifled with. However, we (and the STRIDE platform) struggle to see how they grow from here based on their track record. We recommend holding if you're in it as it has a great dividend track record and has genuine interest in shareholder returns. Without growth, this view could change soon, though.

Disclosure:The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.